They Just Wanna Sell You a Bond Fund

No not Pimco — or me (who’s marketing an online compendium of 46 years of my Investment Outlooks for $9.99) No, I’m talking about investment managers touting bullish forecasts for 4.60% 10-year Treasuries. Pimco’s not one of ‘em nor am I. Reunited in spirit at least. But many managers are bullish on bonds.

Some background. Vanguard’s Total Bond Market Index Fund has provided a negative .1% total return over the last 5 years — includes income plus percentage price change. Now, however, bond bulls cite 2-3% forward inflation and a Fed cut, two, or three to suggest 10-year yields move to 4% which would produce a 7%+ total return for the balance of 2024. Not gonna happen in my view.

This concept of “total return” was a phrase Pimco originated in the depths of the bond bear market in the early 1980’s. Such commonsensical brilliance emanated from a 15%, 30-year Treasury yield and the observation that based on rock bottom durations of 6-7 years they could go to 17.5% before an investor would be in the red. Not slam dunk at the time but close. Thus, managers were able to reverse the past reality of “certificates of confiscation” for which they were known at the time and produce a “total return” that was positive. Worked for a long time, until the summer of 2020 when 10-year yields bottomed at 53 basis points and these “investments” came to resemble Sisyphus headed downhill — 2 steps down, one step back up in price. Because yields were near 0%, not 15%, and durations were now in the 20+ year category, total return was dead.

Does this trend continue? Well not in the same magnitude and much depends on future inflation, the Fed’s R* (real short rate target), and future supply. It’s the future supply of Treasuries that I want to address. The outstanding balance of Treasuries has been increasing at a 10%+ annual rate for the past 18 months — a result of fiscal post-Covid deficits of 2-3 trillion dollars. At the end of 2023’s fourth quarter there was nearly 30 trillion of outstanding public debt issued by the Federal government, growing at 10% a year.